Cash-Flow Forecasting and Working Capital

Cash-Flow Forecasting

A Cash-flow forecast is a prediction of a business’s future financial position, specifically its inflows and outflows of cash.
It enables the business to effectively manage its cash, helping to identify potential shortfalls or excesses in cash.
The main components of a forecast are cash inflows (money coming into the business) and cash outflows (money leaving the business).
A cash surplus is when inflows exceed outflows, while a cash deficit is when outflows exceed inflows.

Working Capital

Working capital is the money available to a business for its day-to-day operations.
It is defined as the difference between current assets and current liabilities.
Current assets are items that can be easily converted into cash within a year such as cash on hand, stock, and debtors, whereas current liabilities are amounts due to be paid within a year such as short-term loans, creditors, and overdrafts.
Positive working capital means current assets exceed current liabilities, while negative working capital means current liabilities exceed current assets.

Effects of Cash-Flow and Working Capital Issues

Poor cash-flow can lead to business failure if it is not addressed. It can also cause strains in relationships with suppliers if payments are delayed.
Shortages in working capital can limit a business’s ability to deal with unexpected changes or emergencies, or to take advantage of growth opportunities.
Too much working capital can also be a problem, as it often means that the business’s resources are not being used effectively.

Managing Cash-Flow and Working Capital

Reducing costs, increasing prices, improving invoicing, or securing additional finance can help improve cash-flow.
Tightening credit control, managing inventory effectively, organising regular, timely reviews of cash-flow forecasts and extending the time taken to pay suppliers can also increase working capital.